IMF Approves US$39 Million Stand-By Credit for Estonia

The International Monetary Fund (IMF) today approved an 18-month stand-by credit for Estonia in an amount equivalent to SDR 29.34 million (about US$39 million) to support the government's 2000-2001 economic program. Estonia will treat the stand-by credit as precautionary and does not intend to draw on it.

After the IMF Executive Board's discussion on Estonia, Shigemitsu Sugisaki, Deputy Managing Director, made the following statement:

"The Estonian authorities have committed themselves to a comprehensive and well-balanced program for maintaining macroeconomic stability and completing structural reforms. These policies are expected to support the economic recovery now under way and to lay the foundation for sustained growth over the medium term, while safeguarding Estonia's external position. The authorities have indicated that they intend to treat this arrangement as precautionary. Estonia has not used Fund resources under three earlier arrangements.

"Estonia suffered a steep downturn in economic activity in the aftermath of the August 1998 Russian crisis. However, the economy's growth resumed in the second half of 1999 and appears to be accelerating. Accordingly, the authorities' program is focused appropriately on phasing out the discretionary fiscal stimulus provided in 1999, with a fiscal deficit of 1¼ percent targeted for 2000. The authorities' program also aims at reducing the size of government expenditures relative to GDP over time. To that end, general government expenditures will remain broadly frozen in real terms in 2000, including by keeping pensions and public sector wages broadly unchanged after excessively large increases in 1999.

"The policy of strict adherence to the currency board arrangement has served Estonia well and the currency board arrangement remains the cornerstone of the authorities' policy framework. This framework requires the continuation of sound fiscal policy, the safeguarding of financial sector stability, continued structural reforms, labor market flexibility, and a cautious approach to foreign borrowing.

"The banking system has been materially strengthened through comprehensive consolidation, enhanced banking supervision, and the participation of foreign investors providing capital and liquidity support and strengthened bank management.

"The authorities also intend to complete structural reforms with the objective of meeting all EU accession requirements by early 2003. The agenda for structural reforms very appropriately focuses on public administration, the pension system, the privatization of the few remaining large infrastructure state enterprises, and addressing the complex economic, social, and environmental issues related to oil-shale mining and electricity generation," Sugisaki said.

ANNEX

Program Summary
In the aftermath of the Russian financial crisis, Estonia experienced declining exports and GDP and a widening fiscal deficit, as did the other Baltic countries. Only in the case of Estonia was there also a pronounced reduction in the current account deficit, as private sector demand contracted sharply. The effects of the crisis, international capital markets disturbances, banking system problems, and stock market collapse have been successfully overcome, and growth of exports and the economy has resumed—with the economy emerging much healthier in many ways than before the crisis.

Estonia's program forms an integral part of the country's medium-term EU accession strategy. Under the program, macroeconomic objectives and policies are geared toward ensuring rapid and sustainable growth over the medium term. While the 1997/98 program had focused on cooling an overheating economy and reining in an unsustainably high current account deficit, the present economic situation is fundamentally different. The downturn in domestic demand has sharply cut the current account deficit, obviating a need to further restrain domestic demand because of balance of payments pressures, and the economy has only just started to recover. Under the program, real GDP growth is expected to accelerate to about 4% in 2000 and to about 6% in 2001, from negative levels in 1999.

Because Estonia is a small and wide-open economy with a currency board arrangement, the authorities do not target inflation rates. They forecast a moderate increase in both CPI and GDP inflation on account of the recovery and increases in indirect taxes. The Bank of Estonia intends to continue to adhere to the requirements of the currency board arrangement and abstain from providing credit to the government or the banking system. The Bank of Estonia does not set interest rates nor aim at any credit or money supply targets. The authorities see the recent recovery of broad money growth as healthy.

On the fiscal policy side, the budget remains the only substantive, direct macroeconomic policy instrument available. Estonia's program aims toward a cyclically balanced budget position, reducing the budget deficit to 1.25% of GDP in 2000 and eliminating the deficit altogether in 2001, from a deficit of 4.8% of GDP in 1999. Key elements of the 2000 budget are the hold on pensions and public sector wages, the abolition of the corporate profit tax, and the compensating increases in other taxes.

Estonia remains a leader among transition countries in the pace of structural reforms, and with the privatization of enterprises well advanced, has benefited through foreign investment, improved management, and corporate governance. Key components of the program's structural reform agenda are the privatization and restructuring of the few remaining major infrastructure firms; improved supervision over financial markets through the eventual introduction of a unified supervision agency; reform of public administration; and reform in pension and health areas. Further legal and institutional reforms are largely driven by the objective of meeting all European Union accession requirements by January 1, 2003.

Estonia joined the IMF on May 26, 1992, and its quota1 is SDR 65.2 million (about US$87 million). Its outstanding use of IMF financing currently totals SDR 17 million (about US$23 million).

Estonia: Selected Macroeconomic Indicators, 1996-2001

(In units as indicated)

1996

1997

1998

1999

2000

2001

Prel.

Proj.

Proj.

National income, prices, and wages

Nominal GDP (in millions of kroons)

52,446

64,324

73,213

74,310

80,036

87,115

GDP (in millions of U.S. dollars)

4,357

4,637

5,209

5,055

...

...

Real GDP growth (year-on-year in percent)

3.9

10.6

4.0

-1.3

4.0

6.0

Average CPI (year-on-year change in percent) 1/ 2/

23.1

11.2

8.2

3.3

4.6

3.0

12-month CPI (end-of-period change in percent) 1/ 2/

14.8

12.5

4.4

3.9

4.8

2.4

GDP deflator (year-on-year change in percent)

24.0

10.9

9.4

2.9

3.5

2.7

Average monthly wage (end-of-period, in U.S. dollars)

291

318

360

347

377

412

Saving-investment balances (in percent of GDP)

Domestic saving

18.6

19.5

20.1

19.1

22.4

22.0

Private

15.2

13.6

16.2

19.5

19.6

17.8

Public

3.5

6.0

3.9

-0.4

2.8

4.2

Domestic investment

27.8

31.7

29.3

23.2

27.9

28.0

Private

22.9

27.8

25.1

18.9

23.9

23.8

Public

4.9

3.9

4.2

4.3

4.0

4.2

Foreign saving

9.2

12.1

9.2

4.1

5.5

6.0

General government (in percent of GDP) 3/

Revenue

39.0

39.6

39.5

39.1

40.6

39.0

Expenditure 4/

40.6

37.4

39.8

43.9

41.9

39.0

Fiscal balance

-1.5

2.2

-0.3

-4.8

-1.2

0.0

External sector (in millions of U.S. dollars)

Trade balance

-1,021

-1,128

-1,117

-770

-803

-928

Exports

1,814

2,297

2,684

2,467

2,576

2,824

Imports

-2,834

-3,426

-3,801

-3,237

-3,379

-3,752

Service balance

519

593

572

555

498

533

Receipts

1,109

1,324

1,478

1,465

1,463

1,604

Payments

-590

-731

-906

-909

-965

-1,071

Current account

-399

-563

-480

-209

-285

-343

Change in net foreign asset position of commercial banks since previous period (in millions of U.S. dollars, +increase)